UPDATE 2-Europe clinches deals on banks, budget, youth jobless

* EU leaders agree youth unemployment fund, SME credit

* Summit follows breakthrough on bank resolution, EU budget

* Hitch over British rebate overcome, officials say

By Luke Baker and Paul Taylor

BRUSSELS, June 27 European leaders agreed on new
steps to fight youth unemployment and promote lending to
credit-starved small business on Thursday after deals on banking
resolution and the long-term EU budget gave their summit a much
needed lift.

The 27 leaders resolved to spend 6 billion euros over the
next two years to support job creation, training and
apprenticeships for young people, and to raid unspent EU budget
funds to keep the effort going thereafter.

Critics say the money is a drop in the ocean with more than
19 million people unemployed in the EU, and more than half of
all young people under 25 without a job in Spain and Greece.

Leaders also approved plans for the European Investment Bank
to lend hundreds of billions of euros to small and medium-sized
enterprises (SMEs) particularly in southern EU states where bank
finance has largely dried up due to the euro zone's debt crisis.

"The last 24 hours have been a great success," European
Commission President Jose Manuel Barroso told a news conference.
"Today we have agreed the money to back up our words."

After late-night talks in Luxembourg, European Union finance
ministers agreed how to share the cost of future bank failures
among investors and wealthy savers as far as possible.

Separately, negotiators for the European Parliament, the
European Commission and EU member governments clinched a deal on
a 960 billion euro ($1.25 trillion) seven-year budget for the
bloc for the period 2014-20, ending months of squabbling.

The leaders unanimously endorsed the agreement, EU Council
President Herman Van Rompuy said, overcoming a last minute snag
over Britain's rebate, which will remain intact. The European
Parliament must approve the deal next month so the new budget
can take effect next January.

The banking resolution agreement designed to shield European
taxpayers from having to foot the bill for rescuing troubled
banks will be implemented on a national basis from 2018.

It lays the ground for a single system to resolve failed
banks in the euro zone and the 27-nation EU, the second stage of
what policymakers call a European banking union, meant to
strengthen supervision and stability of the financial sector.

The European Commission, the EU's executive, will put
forward proposals for a single resolution mechanism next week,
but any deal on it is a long way off because EU paymaster
Germany opposes taking any liability for other countries' banks.

German Chancellor Angela Merkel welcomed the EU budget
breakthrough, saying it would allow new spending on everything
from agriculture to research, roads, bridges and development aid
to move ahead, promoting economic growth in Europe.

LOW GROWTH, NO JOB

With two major obstacles out of the way, EU leaders faced a
far less awkward agenda during the two-day summit focused on
unemployment, the most devastating legacy of the crisis that has
bedevilled the EU since 2010.

The last summit before Germany's September general election
- a key date in Europe's political calendar - was one of the
least contentious of the past three years.

But Merkel, favourite in opinion polls to win a third term,
denied widespread talk that key European decisions on crisis
management, banking union and issues such as entry negotiations
with Turkey and carbon emissions for cars were on hold until
after the vote.

"I know of no issue on which a decision has not been taken
because of the fact that we have elections in three months'
time," she told reporters.

The calm summit mood was a far cry from the peak of the debt
and economic turmoil of late 2011 and early-to-mid 2012, when
there was a real threat of the euro zone collapsing.

Since then, thanks largely to a promise by the European
Central Bank last July to do whatever it takes to defend the
single currency, pressure from financial markets has eased and
EU leaders have made some progress in reforming their economies.

As well as strict new rules on budget deficits and tighter
oversight of budget spending plans by the European Commission,
steps have been taken to improve banking supervision and weaken
the link between indebted countries and problem banks.

From late next year, the European Central Bank will become
the single supervisor for virtually all the euro zone's 6,000
banks - the first stage of banking union.

The next step, the creation of a single resolution
mechanism, is likely to prove a deeply divisive and drawn out
process, with sharp differences between the views of the EU
institutions, Germany, France and other member states.

Further-reaching plans for a single bank deposit guarantee
across the euro zone look unlikely to gain traction due to
German and north European opposition, although officially the
idea remains on the table.

Most of Europe has been either in recession or on the brink
for the past three years, while unemployment has steadily risen.
EU unemployment now stands at 11 percent, the highest since
records began, with youth unemployment a particular problem,
especially in Spain, Greece, Italy, Portugal and Cyprus.

The new EU fund will back a "youth employment initiative"
that would offer people under 25 a promise of a job, training or
apprenticeship within four months of leaving education or
becoming unemployed.

Politicians and sociologists are worried that extended
unemployment for young Europeans will lead to a "lost
generation" that never gets fully incorporated into economic
life, with deep psychological and financial implications.

That will even further undermine Europe's ability to boost
growth and compete with the rest of the world, especially China
and a United States that is shifting its focus to Asia.

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